The invisible hand of internal markets in mutual fund families

Luis Goncalves-Pinto; Juan Sotes-Paladino; Jing Xu

doi:10.1016/j.jbankfin.2018.02.001

The invisible hand of internal markets in mutual fund families

Luis Goncalves-Pinto^*, Juan Sotes-Paladino, Jing Xu

^*Corresponding author for this work

Research output: Contribution to journal › Article › peer-review

2 Scopus citations

Abstract

The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.

Original language	English
Pages (from-to)	105-124
Number of pages	20
Journal	Journal of Banking and Finance
Volume	89
DOIs	https://doi.org/10.1016/j.jbankfin.2018.02.001
State	Published - Apr 2018
Externally published	Yes

Bibliographical note

Funding Information:
For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133 .

Funding Information:
For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133.

Publisher Copyright:
© 2018 Elsevier B.V.

Keywords

Benchmarking
Cross-trading
Mutual fund families
Stock illiquidity

Access to Document

10.1016/j.jbankfin.2018.02.001

Cite this

@article{7d326bf839cb4c52bd3c8d34c37a0fb8,

title = "The invisible hand of internal markets in mutual fund families",

abstract = "The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds{\textquoteright} portfolios from their benchmarks.",

keywords = "Benchmarking, Cross-trading, Mutual fund families, Stock illiquidity",

author = "Luis Goncalves-Pinto and Juan Sotes-Paladino and Jing Xu",

note = "Funding Information: For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Cat{\'o}lica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133 . Funding Information: For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Cat{\'o}lica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133. Publisher Copyright: {\textcopyright} 2018 Elsevier B.V.",

year = "2018",

month = apr,

doi = "10.1016/j.jbankfin.2018.02.001",

language = "English",

volume = "89",

pages = "105--124",

journal = "Journal of Banking and Finance",

issn = "0378-4266",

publisher = "Elsevier",

}

TY - JOUR

T1 - The invisible hand of internal markets in mutual fund families

AU - Goncalves-Pinto, Luis

AU - Sotes-Paladino, Juan

AU - Xu, Jing

N1 - Funding Information: For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133 . Funding Information: For helpful comments and discussions, we thank Elias Albagli, Gordon Alexander, David Gallagher, Hugh H. Kim, Alberto Manconi, Filippo Massari, Pedro Matos, Marco Navone, Marcel Rindisbacher, Antonios Sangvinatsos, Giorgo Sertsios, Nico Singer, Chengwei Wang, and Fernando Zapatero. We also appreciate the comments of participants at the Australasian Finance and Banking Conference, the International Conference on Asia-Pacific Financial Markets (CAFM), the FIRN Conference, the FMA Asia Conference, the FIRS Conference, the FMA European Conference, the LBS Annual Trans-Atlantic Doctoral Conference, the Portuguese Finance Network Conference, the World Finance Conference, and seminar participants at Deakin University, Instituto de Empresa, Manchester Business School, Nova School of Business and Economics, Pontificia Universidad Católica de Chile, Universidad de los Andes (Chile) and Vienna Graduate School of Finance. This paper previously circulated under the title “The Value of Cross-Trading to Mutual Fund Families in Illiquid Markets: A Portfolio Choice Approach.” Goncalves-Pinto gratefully acknowledges financial support from Singapore MOE AcRF Tier-1 Grant No. R-315-000-094-133. Publisher Copyright: © 2018 Elsevier B.V.

PY - 2018/4

Y1 - 2018/4

N2 - The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.

AB - The internal markets of fund families can encourage member funds to deviate excessively from their investment mandates. Theoretically, we show that fund managers following sufficiently different style benchmarks can engage in risk-shifting by trading with one another at low cost inside their family. This benefits the managers and the family even in the absence of a family-level strategy. However, the excessive risks taken by the managers can be costly to fund investors. Empirically, we find support for the positive effect of intra-family style diversity on offsetting trades across funds and on deviations of funds’ portfolios from their benchmarks.

KW - Benchmarking

KW - Cross-trading

KW - Mutual fund families

KW - Stock illiquidity

UR - http://www.scopus.com/inward/record.url?scp=85044631332&partnerID=8YFLogxK

U2 - 10.1016/j.jbankfin.2018.02.001

DO - 10.1016/j.jbankfin.2018.02.001

M3 - Article

AN - SCOPUS:85044631332

SN - 0378-4266

VL - 89

SP - 105

EP - 124

JO - Journal of Banking and Finance

JF - Journal of Banking and Finance

ER -

The invisible hand of internal markets in mutual fund families

Abstract

Bibliographical note

Keywords

Access to Document

Other files and links

Fingerprint

Cite this